Derogatory Credit Items And Bad Credit Mortgage Guidelines

This BLOG On Derogatory Credit Items And Bad Credit Mortgage Guidelines Was UPDATED On January 3rd, 2019

Mortgage Borrowers can qualify for home loans with Derogatory credit items and bad credit. The key question is has the borrower re-established their credit after a period of bad credit? Lenders understand that people go through periods of bad credit when they have a disruption of income flow. Cases, where the consumer can not pay their bills on time, is when they have extenuating circumstances as the following:

  • Loss of job
  • Loss of business
  • Divorce
  • Death in family
  • Medical Issues
  • Other issues where it disrupts household income

In this article, we will cover and discuss Derogatory Credit Items And Bad Credit Mortgage Guidelines.

Qualifying For Home Loans With Derogatory Credit Items

Recent Late Payments and derogatory credit items hurt credit scores and can disqualify borrowers from qualifying for home loans.

  • Creditors will pull credit report
  • They look at credit scores but will also look at the overall credit report
  • Credit history and especially derogatory credit items are thoroughly evaluated
  • There are derogatory credit items that will really be scrutinized and will always be a red flag
  • We will discuss the top derogatory credit items that will impact qualifying for a mortgage
  • Home Buyers can qualify for home loans with outstanding collections, charge offs, and other derogatory credit items

What Are Charge Offs On Credit Report

When consumers are late on monthly credit payments, the creditor will start sending reminder notices month after month.

  • After several months of trying to collect on a debt, the creditor might deem debt as debt as not collectible
  • After four months of zero payments from consumers, creditors normally write the debt off their books
  • Classify it as a charge off
  • Charge off accounts is reported on the credit report as a charge off account or profit and loss
  • Charge offs accounts can be buried on the books of creditors
  • Or the creditor might sell the bad debt to a credit collection agency for pennies on the dollar
  • In most cases, the same debt that has been charged off is re-reported on credit report by the collection agency
  • Basically, consumers can have two negative creditors reporting on the credit report for the same debt
  • Credit scores will definitely drop due to the negative fresh credit reporting
  • Charge off account may be updated to a collection status
  • Or the charge off may just remain as a charge off account
  • The new collection agency might report a new collection status on credit report

Charge offs and collection accounts will remain for a period of 7 years on credit report from the date of last activity.

Public Records On Credit Report

Public records are the following:

  • Bankruptcy
  • Foreclosure
  • Short Sale
  • Deed In Lieu Of Foreclosure
  • Judgments
  • Tax liens
  • Federal Student Loan Debts

What Are Public Records

Public Records are serious derogatory credit items that will be reported on the credit reports.

  • Credit liabilities are listed on bankruptcy filings
  • Every creditor will be reported as being discharged in the bankruptcy petition
  • Petitioners with dozens of derogatory credit items as part of bankruptcy, each of those derogatory credit items will be reported on the credit report
  • It will report zero balances after the bankruptcy has been discharged
  • Bankruptcy is reported on the credit report for a period of 10 years for Chapter 7 Bankruptcy
  • It is reported on the credit report for 7 years on Chapter 13 Bankruptcy
  • Most folks who file bankruptcy get their credit re-established in a matter of a year
  • Best way to re-establish credit after bankruptcy and foreclosure is by getting three secured credit cards with at least $500 credit limit
  • By doing this, they can have credit scores over 700 plus
  • A bankruptcy can drop credit scores by more than 150 points

This drop is a temporary drop and can easily get boosted by adding secured credit cards.

Foreclosure On Credit Report

Homeowners who default on the mortgage, the lender forecloses on a home and starts foreclosure proceedings. Foreclosure is recorded on the credit report.

  • A foreclosure will drop a credit score by more than 100 points
  • A foreclosure, deed in lieu of foreclosure, short sale will remain on credit report for a period of 7 years
  • However, consumers  can re-establish credit right after foreclosure and recoup the credit drop in a matter of several months by re-establishing credit

Tax Liens On Credit Report

Tax liens are derogatory credit items that will drop credit scores and can be on credit reports for a period of 15 years.

  • Tax liens are not dischargeable in a bankruptcy and petitioners will be liable to pay any tax liens and/or government debt
  • Paid tax liens remain on credit report for a period of 10 years

Judgment On Credit Report

Judgments are one of the worst derogatory credit items any consumer can have on the credit reports.

  • An unpaid collection account can turn into judgment if the creditor pursues legal proceedings
  • A judgment is normally effective for a period of 10 years
  • Judgment creditors can renew a judgment for an additional 10 years for a total of 20 plus years

A judgment creditor can pursue enforcement of a judgment by the following:

  • Garnishing wages
  • Freezing bank accounts
  • Placing liens on property and assets

A judgment debtor can do the following to clear their judgment:

  • Try to have the judgment vacated
  • Pay the judgment
  • Negotiate judgment
  • Make payment arrangements
  • File bankruptcy to get rid of the judgment
  • Judgments are like cancer
  • Judgment creditor can leave debtors alone for many years
  • Once they get a wind that judgment debtors are making money or have assets, they can come after them aggressively
  • A judgment will remain on credit report for a period of 7 years from the date the judgment was entered

However, even if the judgment falls off the credit report after 7 years, the judgment may still be in force for a period of 10 or more years depending on the statute of limitations on the state.

Mortgage Guidelines In Qualifying For Home Loans With Derogatory Credit Items

As mentioned earlier, homebuyers can qualify for a mortgage with bad credit. However, it is alright to have periods of bad credit due to extenuating circumstances but lenders want to see re-established credit after a period of bad credit.

Here are the basic mortgage guidelines on all home loan programs:

  • No Late Payments in past 12 months
  • FHA requires 580 credit score for 3.5% down payment home purchase loans
  • VA Loans do not have a specific credit score requirement but a 580 credit score is recommended for an approve/eligible per Automated Underwriting System
  • Outstanding collections and charge off accounts do not have to be paid to qualify for VA Home Loans and FHA Home Loans
  • Two year waiting period to qualify for VA Loans and FHA Loans after Chapter 7 Bankruptcy discharged date

Three-year waiting period to qualify for FHA Home Loans after the following:

    • Foreclosure
    • Deed In Lieu Of Foreclosure
    • Short Sale
  • The waiting period is reduced to two year waiting period after foreclosure, deed in lieu of foreclosure, short sale on VA Mortgage Loans
  • Four-year waiting period to qualify for Conventional Loans after a deed in lieu of foreclosure and/or short sale
  • Seven-year waiting period to qualify for Conventional Loans after foreclosure

Qualifying For VA Home Loans And FHA Loans During And After Chapter 13 Bankruptcy

The Department Of Veteran Affairs (VA) and HUD, the parent of FHA, has the same mortgage guidelines during and after Chapter 13 Bankruptcy:

  • Home Buyers can qualify for VA Loans and FHA Loans one year into a Chapter 13 Bankruptcy Repayment Plan
  • Provide 12 months of timely payments to creditors
  • Approval of Chapter 13 Bankruptcy Trustee 
  • No Waiting Period After Chapter 13 Bankruptcy discharged date on VA Loans and FHA Loans

Gustan Cho Associates are experts in originating and funding VA and FHA Loans during and after Chapter 13 Bankruptcy.

Qualifying For Home Loans With Derogatory Credit With Lender With No Overlays

Home Buyers with less than perfect credit needing to get qualified and pre-approved for a mortgage with direct lender with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates has zero lender overlays on government and conventional loans.

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